U.S. stock markets remain muted ahead of the Fed’s September FOMC meeting scheduled for Sep 19 and 20. Wall Street has seen a bull run in 2023 after a highly disappointing 2022. However, in the past one and a half months, volatility has returned to U.S. stock markets. This was primarily due to concerns regarding the central bank’s decision on monetary policies in the FOMC meeting this month.
Fed Likely to Maintain a Status Quo
On Sep 11, the Wall Street Journal reported that in a major shift from its rigorous interest rate hike policy, the Fed would restrain from a rate hike at this month’s FOMC meeting. Moreover, the journal reported that Fed officials are considering all aspects about whether more rate hikes are at all needed this year.
At present, the Fed fund rate is in the range of 5.25-5.5%. The CME FedWatch tool shows a 98% probability that the Fed will maintain a status quo in the September FOMC meeting, while there is a mere 2% chance that the rate will be hiked by 25 basis points.
The inflation rate has been dwindling steadily since June 2022. The consumer price index in August reached a three-month high. However, this was primarily due to higher energy prices. Moreover, the fundamentals of the economy remain strong with a resilient labor market and solid consumer spending. These developments have brightened the chance of the Fed’s so-called “soft landing” and reduced the possibility of a near-term recession.
Although the inflation rate is currently well above the Fed’s 2% target level, the majority of Fed officials are of the view that further tightening of monetary policies may be detrimental to the economy. Monetary policy variables always affect the economy during a lag period. Therefore, Fed officials believe that the central bank should wait for the full effect of the current level of interest rate to be visible.
Growth Sectors to Benefit
A high interest rate is detrimental to growth sectors like technology and consumer discretionary. Stock prices of growth stocks provide solid returns over a longer period of time. A higher interest rate means higher discount rate, which reduces the net present value of investment in these stocks.
Moreover, these companies depend on cheap credit to grow in the near future. Therefore, a pause in interest rate hike will be beneficial for these sectors. Any positive commentary by Fed Chairman Jerome Powell in his post-FOMC statement will boost prices of these stocks.
Our Top Picks
We have narrowed our search to five technology giants that have strong potential left for the rest of 2023. These stocks have seen positive earnings estimate revisions in the past 60 days. Each of our picks sports a Zacks Rank #1 (Strong Buy).
Amazon.com Inc. AMZN has been benefiting from a strengthening AWS services portfolio and its growing adoption rate has contributed well. Ultrafast delivery services and an expanding content portfolio are positives for AMZN. The strengthening relationship with third-party sellers is also encouraging. Its robust advertising business is also contributing well. Improving Alexa skills along with robust smart home product offerings are tailwinds for AMZN.
Amazon has an expected revenue and earnings growth rate of 11.1% and more than 100%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 3.2% over the past 30 days.
NVIDIA Corp. NVDA reported second-quarter fiscal 2024 adjusted earnings of $2.70 per share, surpassing the Zacks Consensus Estimate of $2.09. NVDA posted revenues of $13.51 billion for the quarter, outpacing the Zacks Consensus Estimate by 20.89%. Management sees third-quarter revenues of $16 billion. The Zacks Consensus Estimate is pegged at $12.34 billion.
NVIDIA has an expected revenue and earnings growth rate of 81.7% and more than 100%, respectively, for the current year (ending January 2024). The Zacks Consensus Estimate for current-year earnings has improved 32.6% over the past 30 days.
Manhattan Associates Inc. MANH develops, sells, deploys, services, and maintains software solutions to manage supply chains, inventory, and omnichannel operations. MANH offers Manhattan SCALE, a portfolio of logistics execution solutions that provide trading partner management, yard management, optimization, warehouse management, transportation execution services, and Manhattan Active, a set of enterprise and omnichannel solutions.
Manhattan Associates has an expected revenue and earnings growth rate of 16.1% and 12%, respectively, for the current year. The Zacks Consensus Estimate for current-year earnings has improved 7.7% over the past 60 days.
Super Micro Computer Inc. SMCI designs, develops, manufactures and sells energy-efficient, application-optimized server solutions based on the x86 architecture. SMCI’s solutions include a range of rack mount and blade server systems, as well as components. SMCI emphasizes superior product design and uncompromising quality control to produce industry-leading server-boards, chassis and server systems.
Super Micro Computer has an expected revenue and earnings growth rate of 37% and 31.6%, respectively, for the current year (ending June 2024). The Zacks Consensus Estimate for current-year earnings has improved 68.2% over the past 60 days.
Paylocity Holding Corp. PCTY is benefiting from the growing adoption of its solutions among clients with less than 50 employees. Healthy momentum in PCTY’s core and upper end of the market is a tailwind. The release of the Learning Management System and Community portal, which garnered positive feedback from clients, is encouraging.
PCTY’s regular investments in technological upgrades, along with product innovation, will continue to boost its top line. The addition of on-demand pay to its portfolio is likely to generate more client wins. We expect PCTY’s revenues to witness a CAGR of 23.4% through fiscal 2023-2025.
Paylocity Holding has an expected revenue and earnings growth rate of 19.9% and 8.4%, respectively, for the current year (ending June 2024). The Zacks Consensus Estimate for current-year earnings has improved 9% over the past 30 days.
Amazon.com, Inc. (AMZN): Free Stock Analysis Report
NVIDIA Corporation (NVDA): Free Stock Analysis Report
Manhattan Associates, Inc. (MANH): Free Stock Analysis Report
Super Micro Computer, Inc. (SMCI): Free Stock Analysis Report
Paylocity Holding Corporation (PCTY): Free Stock Analysis Report
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